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Article Archive For Lawrence D. Cavanagh

  • Real-World Option Pricing by Lawrence D. Cavanagh

    ARTICLE SYNOPSIS ...Real-World Option Pricing by Lawrence D. Cavanagh Option models calculate premiums or the prices of options on the assumption that volatility is a constant. Here's how stock and index price changes are distributed in the real world and how the market prices options. Are the prices of options accurately reflected by option models? Let's contrast the distribution of stock index movements with the log-normal distribution postulated in most option models. We can attempt to understand the way prices actually move, and also why the market has a tendency to price options so that those struck farthe...

  • On Option Theta by Lawrence D. Cavanagh

    ARTICLE SYNOPSIS ...On Option Theta by Lawrence D. Cavanagh Options traders use various measurements to calculate an option's risk, the calculations of which are denoted by Greek letters. One example is theta, which is the measure of how much an option's price decreases for each day that passes. A nyone who has ever traded options quickly becomes aware that if all things remain equal, then over time, the price (or premium) of the option declines. Theta (q) is the Greek letter used to mark the decay of an option premium over time. This price decay is nonlinear (that is, it changes over time), and most of the tim...

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